Written by Bob Schneider Posted on July 9, 2010
Launched at the start of the new millennium, the Global XBRL Academic Competition is almost as old as XBRL itself. In an interview with this blog a couple of years ago, Saeed Roohani -- Program Chair for the Competition and Professor of Accounting at Bryant University – noted that the earliest entries focused on “awareness” issues, i.e., “do you know what XBRL is?” More recently, however, with the adoption of XBRL in an increasing number of jurisdictions, the students’ research has been addressing “implementation, value proposition issues, and internationalization.”
A good example is the paper An Analysis of the Implementation of XBRL by Merchandisers and Manufacturers, which received Honorable Mention in the 2009-2010 competition. Advised by his professor Neal Hannon, a leading XBRL expert, Constantine “Dean” Proestakes compared the elements chosen by six companies -- three merchandisers and three manufacturers -- for the same line items on their respective balance sheets for a quarterly report. His work found interesting variations in the elements companies chose for the same line item. One example he cites is that for Property, Plant, and Equipment (page 5):
Specifically, the computer manufacturing companies of Dell and Apple chose to report this line item using an extension, whereas the other four companies used the standard XBRL element “<us-gaap: PropertyPlantAndEquipmentNet>”. Hewlett-Packard was the only computer manufacturer of the three not to create an extension for this line item. One would think that Hewlett-Packard’s manufacturing operations are similar to that of Dell and Apple. Indeed, there was no separate line item for software on Hewlett-Packard’s balance sheet so there must be a reason why Apple and Dell chose to depart from the existing XBRL Taxonomy and Hewlett-Packard did not.
Mr. Proestakes explains that, according to GAAP, capitalized software is an intangible asset; the definition for the standard Property, Plant, and Equipment element, however, specifically stipulates tangible assets. Mr. Proestakes suggests that Dell and Apple may have believed an extension was necessary to include their (intangible) capitalized software. HP, for whatever reason, did not.
As I read through the paper, I recalled Walter Hamscher’s speech at the recent Rome XII conference, where he noted how XBRL filing is changing traditional accounting statements. Walter noted that data that originally appeared in a few tables in the traditional financials can sometimes be consolidated and better represented in XBRL by using a single table. In turn, the company may decide to use that single table next time for the traditional financials.
Although presentation questions may be distinguished from the conceptual and definitional concerns Mr. Proestakes describes, the larger issue is the same, namely, the impact that creating XBRL exhibits has on traditional financial statements. The process forces (or, more optimistically, enables) accountants to think about their financials and the underlying accounting in fresh and useful ways. When mapping line items to XBRL elements, questions arise: What exactly does this line item include? How do we best define it for XBRL purposes? How do other companies in our industry treat this item? Why do we treat it differently? And, based on our answers, should we change the underlying accounting (e.g., reclassify transactions) to make our statements more comparable and better reflect GAAP?
This potential for improvements to the financial statements and the accounting process may be little solace for overburdened CFOs who consider XBRL exhibits just one more regulatory burden of questionable value. But as with other requirements (for example, Y2K audits) that companies have had to meet, the XBRL mandate will yield unexpected benefits. After the initial hurdles of XBRL filing are passed, CFOs may just find a few pleasant surprises in the cost/benefit calculation.
NOTE: Constantine Proestakes is a Mr., not a Ms.. I apologize to him for the error in my original post.
Bob,
Great article. The only comment I would add is that companies exploit GAAP reporting to "tell their story their way", and XBRL facilitates that "story telling". Therefore it was always envisioned that extensions would be created to enable companies to present exactly the information that they want to, the way they want to present that information.
I remember much discussion of mandating a common reporting structure or minimal set of line items, and that idea being shot down again and again. XBRL was not going to change accounting, and was not being developed to stop or limit companies reporting choices.
After all, companies report the way they do for a number of reasons, one of which being to reduce direct line item to line item comparability. As such, XBRL facilitates the balance of transparency and reporting company opacity choices. So, while we certainly should expect to see greater congruence in reporting and concept selection, we should also expect companies to continue to "tell their story..."
The uptake of XBRL is as predicated on a mandate as on companies' support for mandated adoption. If XBRL is ever viewed as providing a "back door" to reducing reporting options and introducing a mandatory reporting structure, we may find significant push-back from business. That will hurt further adoption, both in the financial reporting vertical and in other business reporting environments.
I think there has always been a trade-off between companies "telling their story their way" and the reception those statements will find with financial statement users. But current trends may be pushing toward more standardization. Analysts have always been reluctant to tackle companies with complex accounting -- I once heard an analyst say that, if he opens an annual report and sees too many footnotes, he throws it away -- but with equity research departments strapped for funds, there's now more pressure than ever to do more with less. Companies that make the analyst's life simpler with transparent accounting will be rewarded. (Of course, business transactions can be complex, and the accounting may be merely -- and accurately -- reflecting that complexity.)
I also think that, intended or unintended, over time XBRL will work toward standardization in accounting. As necessary extensions are added to taxonomies as standard elements, analysts and investors will question the utility of individual extensions that have not become part of taxonomies, and more generally why a company needs significantly more extensions than its peers to report.
Much of the time, however, I think the mapping issues will center merely on getting it right. That's what I take away from Mr. Proestakes's example on PP&E. The standard element indicates tangible only; the company includes intangible assets for that item; how should the company handle the item in XBRL? I think going through that questioning process, comparing the results with peers, perhaps even expanding the dialog to larger accounting issues -- eg, to what extent does the dichotomy of "intangible assets" and "tangible assets" still make sense? -- can only help to improve company accounting over time.